An Employer’s Guide to Company Cars

19 September 2023

Company cars for employees are among the most popular workplace benefits. Acquiring and retaining staff in the current climate is difficult, so providing a new car can be a very enticing perk. But what is a company car and is it suitable for your business? 

In this guide, we’ll look under the bonnet and show you how a company car works, the advantages, the responsibilities, and the potential alternatives. Fasten your seatbelt…



Company car allowance is a scheme for employers. It allows them to provide their employees with a financial incentive, instead of a company owned car.

A company car is a vehicle bought and funded by an employer for its employees to use as a benefit, or often known as a ‘benefit in kind’. A company car is considered such if the driver can take the car from where they work and use it as a method of private transport. 

HOW DOES a company car scheme work?

Despite its name, a company car can be offered by any employer. For example:  

  • Sole traders and other self-employed persons.
  • Limited Liability Partnerships (LLP). 
  • Charities. 
  • Embassies. 
  • Local or government authorities. 
  • Limited Liability Companies (LTD).
  • Public Limited Companies (PLC). 

To qualify for a company car scheme, your employees usually need to be in a permanent and significant position within your business. They would also need to have a regular work pattern, and their wages must not drop below the minimum wage after joining your scheme. 

A company car is classed by HMRC as a privilege paid for by the employer, so employees who enter the scheme must pay Benefit in Kind (BIK) tax. How much they pay depends on: 

  • The car’s age.
  • The fuel type.
  • CO2 emissions.
  • The size of the engine.
  • The car’s list price.
  • The income bracket of the employee.  

Employers can cover expenses associated with a company car, such as the fuel or maintenance. These benefits can be provided to employees in exchange for extra tax paid from their wages. 

company car advantages

Let’s see why how the benefits of a company car can put you in pole position ahead of your competitors. 


Offering a company car can help make employees feel valued. If you pay for maintenance and insurance as well, it means there’s less for an employee to consider and makes them less worried about their finances.  


This can sometimes be overlooked as a way to showcase the brand image of your company. Having the right type of car, with the right colours, can help your company stand out from others. And if you brand your business as environmentally conscious, you could consider using electric or hybrid cars, as proof of your efforts to reduce your business’s impact on the planet.


You might initially think that providing and running company cars is an expense you can do without. But there are benefits for you, as well as your employees.  

For example, if you give cars to staff on a salary sacrifice basis, they pay towards it from their salary. This means you stand to make significant savings on National Insurance (NI) contributions. Also, your employees can reduce their NI and income tax liability if they divert some of their salary to paying for their car.  

You might also want to consider operating your company cars on a leasing scheme, which might save you money on maintenance and any possible replacements. 


There are certain aspects of company cars you need to consider before you go full throttle and start telling your employees about your new scheme. 


If you use a company car scheme to attract talent, it increases your liability as an employer. This means you’d have to pay out for damages if an employee was involved in an accident while driving a company car. Then, you’ll end up with an increase on your company’s car insurance premiums.


Although the costs may pay off in the long run, providing company cars involves a lot of investment upfront especially for small- and medium-sized businesses (SMEs). And there can be extra cost to fork out if the car is in an accident or stolen.


Usually, employers reimburse employees for fuel that’s used on business miles. Each quarter, the Government releases guidelines on how much companies should pay for fuel. The guidelines are broken down by business miles, engine size and the type of fuel. 

You could reimburse any fuel expenses on personal trips if you choose, but your employees would have to pay BIK tax.  

Be aware that sometimes, employees may be tempted to claim personal miles as business miles, to avoid BIK tax. Even if the difference is just a few miles, they run the risk of serious penalties from HMRC. 


Company cars are treated as a taxable benefit and the amount of tax your employees would pay depends on: 

  • Their income tax band. 
  • The car’s value. 
  • The car’s CO2 emissions. 


There are factors to consider when working out the HMRC company car tax: 

  • The P11D value. 
  • Income tax rate. 
  • Fuel 
  • CO2 emissions. 

The easiest way to work out your company car tax is through the HMRC’s calculator. 


As an employer, if you use electric vehicles (EVs) as company cars, your business can stand to save money. This is because you’ll benefit from paying lower car tax. HMRC offer lower rates on EVs and hybrids an incentive to help them achieve their target to phase out traditional petrol and diesel vehicles by 2030.


Of course, there are alternatives to company cars as an employee benefit. 

  • Company car allowanceThis is a popular alternative, where you give employees a financial incentive, rather than a company owned car. You provide an allowance that is used by your employees to cover the cost of their own cars for work purposes. Or, it can help cover the cost of buying or leasing a new car if it’s to be used for work. 
  • Other work benefits – Your employees may not need a company car, or an allowance towards one. In which case, you can offer alternatives such as private healthcare, life insurance or free meals.

Now you can see how company car benefits compare to a company car allowance, and with all the facts on both, you can decide where the road will take you. But if you need further guidance, our tax term can help steer you to a conclusion. Give us a call on 0330 162 4389.